Onmanorama Explains | UPI charges from Oct 15: Who pays, how much and what’s exempt

New Delhi: UPI payments will no longer be entirely free for merchants, with banks set to levy a Merchant Discount Rate (MDR) on certain high-value commercial transactions from October 15.

The charge will apply to most person-to-merchant (P2M) transactions above ₹2,000. Person-to-person (P2P) payments will remain free, irrespective of the amount. Payments to merchants up to ₹2,000 and transactions covered under the zero-MDR framework for small merchants will also remain free. The government says over 95% of P2M transactions will remain unaffected by the MDR.

Here is how the new framework works.

What is MDR and what is changing?
Merchant Discount Rate (MDR) is a fee charged within the payment ecosystem for processing a merchant transaction. It is paid by the merchant and shared among participants in the payment network.

The UPI MDR was discontinued in January 2020. The new framework brings it back for specified merchant transactions, with a threshold of ₹2,000. For most P2M transactions above ₹2,000, the MDR will be 0.4%, capped at ₹300 per transaction for payments of ₹75,000 and above. The earlier UPI MDR rate, before its abolition, was 0.3%.

Will customers have to pay more?
No direct MDR will be charged to customers. The MDR is a merchant-side charge within the payment ecosystem. The government has said banks will ensure merchants do not pass the MDR on to customers. UPI users will continue to have unlimited free P2P usage.

For example, if you buy a product worth ₹2,500 from an online retailer:

The merchant therefore receives ₹2,490 after an MDR of ₹10, assuming the charge is deducted from the transaction amount.

Which transactions remain free?
The following categories remain outside the standard MDR:

• P2P transactions, irrespective of the amount.
• P2M transactions up to ₹2,000.
• Payments received by small merchants under the P2PM framework, subject to the applicable conditions.
• Recurring payments through AutoPay or UPI mandates.
• Small merchants receiving up to ₹1 lakh a month through UPI QR codes under the P2PM category will continue to enjoy zero MDR on their transactions.

Are there exceptions to the 0.4% rate?
Yes. Certain sectors have separate MDR rates rather than the standard 0.4%.

The ₹5 flat-rate category includes railway ticket bookings, telecom payments, insurance premiums, petrol and diesel, electricity and water bills, gas bills, school and university fees, entrance examination fees, credit card bill payments, fertilisers, pesticides and agricultural equipment, cable/Dish TV bills, court fees, tax payments, postal services, government fines, wallet top-ups and toll fees.

Why was ₹2,000 chosen as the threshold?
The threshold means the MDR applies to a relatively small share of merchant transactions while covering a larger share of their value.

According to the government's data analysis, MDR will apply to about 4% of merchant transactions, leaving approximately 96% unaffected.

The accompanying August data cited for the explainer indicates that transactions above ₹2,000 account for about 67% of the total value of commercial UPI transactions, despite representing only about 4% by volume.

Where does the MDR go?
MDR is not a government tax. It is distributed among participants in the payment ecosystem, including banks, payment service providers and UPI application providers.

According to the distribution provided for the new framework:

NPCI will additionally receive a 0.02% switching fee per transaction, according to the information provided.

For a ₹2,500 transaction, the MDR would be ₹10. That amount is distributed within the payment ecosystem rather than being collected from the customer. On a ₹7,000 transaction, the merchant pays ₹28 as MDR, which is then shared among the customer’s bank, UPI app, merchant’s bank and the app’s bank partner.

How does UPI MDR compare with card payments?
The new 0.4% rate is lower than the card MDR figures cited in the source material.

How much could the ecosystem collect?
The payment ecosystem is estimated to receive around ₹16,000 crore annually through the new MDR structure.

The government has described the framework as a measure intended to support the long-term sustainability and expansion of UPI while keeping P2P payments and most merchant transactions free.

Why has the move drawn political criticism?
The Congress has criticised the reintroduction of MDR and alleged that the decision was influenced by US pressure and could help card companies compete with UPI. Congress general secretary in charge of communications Jairam Ramesh also questioned the rationale behind the 0.4% rate.

The BJP rejected the criticism and accused the Congress of spreading misinformation, while reiterating that MDR would not be charged to consumers.

These are competing political claims about the rationale and implications of the policy; the government's stated position is that the framework is intended to support the sustainability of the UPI ecosystem while protecting individuals and small merchants from additional charges.